Even small loans go a long way in countries like Tonga, Vanuatu and Papua New Guinea, but the ability to repay or negotiate refinancing is testing Pacific governments who must now make politically unpopular decisions to service the debts.

That pressure is clearly being felt in Nauru, one of the smallest of the Pacific region’s states. It butted heads with China this week as it hosted the Pacific Island Forum, an intergovernmental organization that aims to enhance regional cooperation.

The clash was ostensibly over a perceived as over-demanding China delegation, but the brouhaha also spoke to the frustration many states feel with China as it aggressively ramps up pressure on individual Pacific states to cut their diplomatic ties with Taiwan.

Nauru President Baron Waqa refused to allow China’s representative to address the forum ahead of the prime minister of Tuvalu. Both Tuvalu and Nauru have maintained ties with Taiwan despite Beijing’s pressures.

Waqa said China’s lead diplomat, Du Qiwen, had been “very insolent” and a “bully”, according to a Reuters report of the incident. After demanding an apology, Waqa said “from this meeting in Nauru, going forward, we will not allow this kind of behavior in our Pacific meeting space,” the report said.

These tensions seem set to escalate as the first round of repayments come due for relatively massive infrastructure loans Pacific nations have taken out with China.

This month, Tonga will begin a repayment schedule for a US$115 million loan from China to redevelop infrastructure in its capital Nuku’alofa and expand infrastructure in rural parts of the island.

For China, the US$115 million loan is barely a rounding error in its estimated US$1 trillion BRI budget. For Tonga, however, it’s almost one-third of its annual gross domestic product and will double the island’s national debt load.

Papua New Guinea (PNG) and Vanuatu are also expected to face debt stress as loans mature in the coming years. PNG owes China nearly US$2 billion arising from concessional loans, or nearly a quarter of its total debt. For Vanuatu the situation is more extreme, with loans owed Beijing representing around half of its external debt.

Gabrielle Chefitz and Sam Parker sounded the alarm in their paper “Debtbook Diplomacy” published by the Harvard University Kennedy School in May. The scholars noted the trend is not exclusive to the Pacific and Asia but has also taken hold in Africa, where similar conversations among leaders are developing.

Map of the South Pacific. Photo: Wikimedia Commons

“Time and time again, countries are pointing to Sri Lanka,” Chefitz says. Last year, Sri Lanka was unable to pay back around US$1 billion in debt after taking out a series of high interest loans under the BRI scheme. By December, China had a controlling equity stake and a 99-year lease on the crucial Hambantota port.

For Pacific Island nations which once embraced China’s easy credit, the incident has been a clear warning of the sovereignty-eroding risks of BRI-related projects and loans.

Australia has traditionally been the largest provider of aid in the region, a position China is fast supplanting. Domestic political priorities have resulted in deep cuts in Australia’s aid budgets, including slashed outlays to Pacific Island nations.

But China’s fast rise in the region has given the Pacific new strategic significance to Australia, particularly amid reports in April that Beijing approached Vanuatu about establishing a naval base on the island nation.

While Canberra has had strained relations with many Pacific nations, often due to perceived as political arrogance, Vanuatu and Australia have enjoyed strong bilateral relations for decades. This has included military and security training as well as the accounting for the majority of the small island nation’s foreign direct investment.

China’s President Xi Jinping (R) and then Vanuatu Prime Minister Sato Kilman (L) at the Great Hall of the People, Beijing, September 1, 2015. Photo: AFP/Pool/Parker Song

Both Vanuatu and China denied they had discussed building a possible naval base, but the reports underscored Australia’s and other Pacific Islands’ rising concerns about Beijing’s commercial and strategic ambitions in the region.

“On one hand countries are waking up to the challenges of what they can and cannot do,” Chefitz says. “But China is more sensitive to its image. After a significant slew of [critical] stories, they’re increasingly mindful of the investments they make and how flexible instruments of debt can be.”

She notes rising perceptions that China is using BRI investments and loans to aggressively snatch up ports and military bases around the Indo-Pacific is damaging its earlier carefully cultivated soft power image.

Some believe Australia could leverage that emerging perception shift to regain lost ground in the Pacific. Greg Colton, a Pacific Islands researcher, noted in a Lowy Institute report earlier this year that while announcements from now ex-prime minister Malcolm Turnbull’s government often referred to “stepping up” engagement with Pacific nations without much detail, policy evolution is actually developing.

Colton, for one, recommends utilizing multilateral relationships with other powers who have existing interests in the region, specifically Japan, the US, France, New Zealand and India, to develop strategies to increase engagement and strengthen ties with these countries traditionally treated as diplomatic afterthoughts.

That may already be happening: In late July, Australia along with the US and Japan announced a vague new plan to compete with BRI projects in the Pacific. While no details of the potential competing scheme have been publicly released, it is expected the partnership would offer similarly-sized loans as the BRI, but with much lower interest rates and without sovereignty-threatening strings attached.

Previous suspicions of Australia, the US and Japan in the Pacific region may have eased in light of the Sri Lanka example and rising concerns of BRI “debt traps.” And with great powers now competing for influence, Pacific states may soon have the luxury of choosing rather than begging for foreign aid and investment.